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Nicosia - Cypriots queued calmly at banks as they
reopened on Thursday under tight controls imposed on transactions to prevent a
run on deposits after the government was forced to accept a stringent EU rescue
package to avert bankruptcy.

Banks were shut almost two weeks ago as the government
negotiated a €10bn international bailout, the first in Europe's single
currency zone to impose losses on bank depositors.

Bank staff turned up for work early as cash was delivered
by armoured trucks, and queues of at least a dozen people formed at branches in
the capital, with uniformed security guards on duty.

Doors opened at noon but initially at least there was no
sign of any major run on the banks, as had been feared.

A lot of money had already left electronically.

Figures published by the Central Bank of Cyprus on
Thursday showed that savers from other euro zone countries withdrew 18% of
their deposits from the stricken island in February, as talk of a tax on bank
accounts rose.

Overall private sector bank deposits in Cyprus fell by
2.2% to €46.4bn
last month, after a similar drop in January.

Authorities say the emergency rules imposed to limit
withdrawals and prevent a bank run will be temporary, initially for seven days,
but economists say they will be difficult to lift as long as the economy is in
crisis.

The capital controls decree was taped to the windows of
bank branches and staff handed out copies to customers. In Nicosia, there was
relief, but some apprehension about what might happen.

"You've no idea how much I've been waiting for
this," said 64-year-old pensioner Froso Kokikou, waiting in line at a
branch of Cyprus Popular Bank, also known as Laiki.

"I feel a sense of fear and disappointment having to
queue up like this; it feels like a Third World country, but what can you
do?" Kokikou said. "This is what they imposed on us and we have to
live with it."

Kostas Nikolaou, a 60-year-old pensioner, said the
uncertainty of the past two weeks had been "like a slow death".

He added: "How can they tell you that you can't
access your own money in the bank? It's our money, we are entitled to it."

Many of those waiting in line were elderly people, who
said they had run out of cash because they did not have bank cards.

The Cyprus stock exchange said it would remain closed on
Thursday.

On international markets, German 10-year bond yields fell
to their lowest level since August on fears of spill-over from the Cyprus
crisis to other struggling euro zone members.

Yields fell 2 basis points to 1.256%.

Traders cited the risk that depositors in other countries
could take fright at any signs of a run on deposits in Cyprus.

Container trucks loaded with cash pulled up inside the
compound of the central bank in the capital Nicosia on Wednesday night to
prepare for the reopening, a central bank source said.

As in all countries that use the euro, Cyprus's central
bank supplies cash for its banks from the European Central Bank (ECB) in Frankfurt.

Officials have promised that enough funds will be on hand
to meet demand. The ECB did not comment on reports it had sent extra cash to
the island.

Cash Limit

A finance ministry decree limited cash withdrawals to no
more than €300
per day and banned the cashing of cheques.

The island's central bank will review all commercial
transactions over €5 000 and scrutinise transactions over €200
000 on an individual basis. People leaving Cyprus may take only €1 000
with them.

With just 860 000 people, Cyprus has about €68bn
in its banks - a vastly outsized financial system that attracted deposits from
foreigners, especially Russians, as an offshore haven but foundered when
investments in neighbouring Greece went sour.

The EU and International Monetary Fund (IMF) concluded
that Cyprus could not afford a rescue unless it imposed losses on depositors,
seen as anathema in previous euro zone bailouts.

That view has angered Cypriots, whose foreign minister
said his country was sacrificing too much for the bailout.

"Europe is pretending to help us but the price to
pay is too high: nothing less than the brutal destruction of our economic
model," Ioannis Kasoulides told the French newspaper Les Echos.

‘Cyprus euro’

Cyprus's financial difficulties have sent tremors through
the already fragile single European currency. The imposition of capital
controls has led economists to warn that a second-class "Cyprus euro"
could emerge, with funds trapped on the island less valuable than euros that
can be freely spent abroad.

Reflecting fears of a spill-over, ratings agency Moody's
said it kept euro zone strugglers Ireland and Portugal on negative outlook,
citing the Cyprus bailout as an extra risk.

The European Commission said the capital controls were
legal and justified under EU law provided they were strictly temporary and
proportionate. The EU executive said it would monitor "the need to extend
the validity of or revise the measures".

The bailout, agreed in Brussels on Monday, looks set to
push Cyprus deeper into an economic slump, shrink the banking sector and cost
thousands of jobs.

Cyprus Popular Bank, the country's second biggest, will
be closed and its guaranteed deposits of up to €100 000 transferred to the
largest bank, Bank of Cyprus.

Deposits of more than €100 000 at both banks, too big
to enjoy a state guarantee, will be frozen, and some of those funds will be
exchanged for shares issued by the banks to recapitalise them.

While big depositors will lose money, the authorities say
deposits up to €100 000 will be protected.

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